Net Energy Metering -- Are We Capitalists Or What?

James Conca
, ContributorI write about nuclear, energy and the environmentOpinions expressed by Forbes Contributors are their own.

The public thinks that electricity is all about what generates it. Coal, natural gas, nuclear, hydro, wind, solar or biomass, heated discussions have focused on costs, carbon and reliability.

Few know or care about the grid that delivers the electricity. It’s as important. But net metering just doesn’t sound like a hot issue. Nevertheless, it could become a major problem in the future if we don’t get it right.

Net metering, or net energy metering (NEM), is a billing system that credits small customers at the full retail electric price for any excess electricity they generate and sell to their local electric company via the grid from on-site small sources such as residential rooftop solar arrays.

This graph shows the typical energy production and consumption for a small source owner, or distributed generation (DG) customer with a rooftop PV solar array. When the customer produces more power than is being consumed, during peak sunlight hours, they can sell it back to the utility company at the full retail price. This is called net energy metering (NEM) or net metering. In 43 States and the District of Columbia, the utilities are forced to pay the full retail price even though it usually costs those utilities much less to produce that electricity themselves, or even to buy it on the wholesale market, and the utilities pay over half of that price in infrastructure support. These small users are still connected to the grid, a requirement for net metering, and also to power their homes at night or when their solar systems don’t produce enough power. Source: Edison Foundation Institute for Electric Innovation.

These small generation sources are referred to as distributed generation (DG) and someone owning or leasing a rooftop solar array is a DG customer. Rooftop solar is the major small distributed energy source (>95%). Wind and other renewables like biomass are very small contributors.

Under most net metering policies, utilities are required to buy a DG customer’s excess power at full retail price even though it costs those utilities much less to produce that electricity themselves, or buy it on the wholesale market.

The point of these policies is to encourage the adoption of distributed solar on residential and business rooftops, parking garages and other buildings, to take advantage of existing surfaces, to generate the energy right where it’s needed, and to reduce the total electric load during peak hours of the day. Along with increased efficiency and conservation, distributed generation can reduce the need to build new large power plants even as the population grows.

Small DG users are still connected to the grid, which is necessary to have net metering, and also to power their homes at night or when their solar arrays don’t produce enough power (see figure).

This is not an academic matter. When - not if - DG customers expand to a significant number, say 5% or 10% of total capacity in the next ten years, the utilities will lose significant power sales. But the utilities are still required to maintain the electric grid from which everyone, including DG customers, must obtain their electricity. So the burden of maintaining the grid, and providing these services, falls on fewer and fewer non-DG customers, and their cost grows.

Isn’t the obvious solution to adjust this practice so it’s equitable to everyone?

Grid-connected solar PV systems effectively use the grid as a big battery, absorbing excess power without having to purchase actual batteries or back-up generation. At the same time, it is essential to appreciate the value of distributed solar to the grid itself, by reducing peak demand, lowering fuel costs and reducing the demand for fossil fuel generation.

This is all part of the global electricity revolution. According to Charlie Ebinger, Director of the Energy Security Initiative at the Brookings Institution, “distributed generation represents the most recent trend in a decades-old evolution of a changing electric power industry.”

We do have a few years to hammer out a real solution. Distributed solar only makes up 0.2% of the U.S. electricity supply. Even in states that have pushed it hard with solar-friendly policies, it’s still less the 2%. This gives us a bit of time to work out the best system to employ it before adverse economic and infrastructure effects are felt on the electric grid.

The adverse effects are becoming visible, however. A report issued last yearby the California Public Utilities Commission found that non-solar customers in the state face over $1 billion annually in higher costs because of net metering. In a state with a GDP of over a trillion dollars, that may not seem like a lot, and the pain is quite distributed over the other 30 million people.

While I dislike unfettered Capitalism, we do generally have to pay for what we use. This is America. If something doesn’t make money, no one will do it. And if someone starts losing money, they generally stop doing it.

If homeowners don’t make money on rooftop arrays, they won’t install them. If the utilities don’t make money on grid services, they will stop providing them.

As Lisa Wood of the Edison Foundation puts it, “[We need] to recognize the value of these grid services and to develop a methodology for the DG customer to pay for using them.” When normal consumers pay their electric bill, part of the bill is for the electricity they actually used, but the other part goes to maintaining the grid, referred to as grid services.

So $60 of this $110, more than half, goes to support these grid activities while only $50 goes to producing the electricity in the first place. Since small source owners, or DG customers, are not ever “off the grid”, even if they’re making more energy than they consume, a 55% gratuity is not a trivial gift given to them by net metering.

Unfortunately, net metering shifts these grid costs from the generally high-income homeowners, that can afford rooftop solar, to non-DG-customers through higher electricity bills. These are often low-income families that can least afford an increase in their monthly bill.

Using the grid smartly allows more renewable energy, more load following, more demand response, more efficiency and conservation, and provides greater grid stability. None of this could happen without the grid and it provides a good deal of benefit to solar owners as well.

In the end, we need to adopt a billing practice that supports both installation and distribution. As geologist and energy consultant Dr. Judith Wright says, “We need a real shift in our energy meme. Perhaps grandfathering in older DG customers at full retail price since they broke this ground, and giving later customers a more equitable wholesale value. Or maybe the DG customer receives the full retail price until the capital investment is paid off. We cannot thrive without a healthy grid. And we should not support income inequality.”

Charlie Ebinger is hopeful. “There have been several notable attempts to fine tune or alter existing policy to address these [net metering] issues. For example, Austin Energy and the State of Minnesota have developed a value of solar tariff as a mechanism to better incorporate all the costs and benefits of solar rooftop PV.”

This Thanksgiving, I’m thankful there’s still time to evolve a robust energy system that rewards reliability and distribution, self-reliance and environmental sustainability.